While the challenges of transitioning to a low carbon economy seem omnipresent, there has been a subtler transition happening that is less obvious but no less relevant as it directly affects the ability of mining companies to control the privilege to operate and, consequently, to do business sustainably and profitably in the long run.
In this article on Integrated External Relations (IEE), global management consulting firm McKinsey said the rising expectations of investors, governments and society imply that “large companies should help solve major economic, environmental, and social problems – even those unrelated to their business”.
This sentiment is significant as it represents a shift away from the neo-liberalist paradigm of maximising profits towards rethinking the purpose of companies. Today, blending the running of a profitable business with a responsibility to contribute more to society than simply increasing the gross domestic product (GDP) is an idea that is growing in popularity.
This shift manifests in the socioeconomic ecosystem in which mining companies are now embedded.
Society has continuously increased in complexity over the past 50 years. Mining companies today need to please consumers, governments and regulators, investors and community stakeholders in order to attract capital, manage brand risk and reputation, and earn social permission to operate.
According to the McKinsey article on IEE, this also means that the cost of compliance is continuously increasing and building good relationships and trust with non-governmental organisations (NGOs), communities, governments and citizens has become a key to competitiveness.
Increasing scrutiny from investors, especially large institutional investors, in combination with today’s interconnectivity of society where we can be in touch with people all over the planet in just an instant, and a rising interest in environmental, social and governance (ESG) issues has transformed the public into an important – and powerful – stakeholder for the mining industry.
Rethinking CSR – expanding the engagement continuum
Many mining companies respond to stakeholder interests with corporate social responsibility (CSR) initiatives. Today, virtually every major mining company releases a CSR report. Yet, conflicts between miners and communities do not seem to be declining. In addition, a recent McKinsey survey of more than 3,500 executives around the world showed that “less than 20 percent of the respondents reported having frequent success influencing government policy and the outcome of regulatory decisions.”
The mining industry has done a lot to manage and improve compliance, to build stakeholder relationships and to initiate and document CSR activities, community investments and philanthropic engagement.
Why are these activities failing to close the trust gap between mining companies, communities, and society?
The problem seems to be that traditional CSR activities, anchored by philanthropy, community investment and performance optimisation, have not improved social, economic, and environmental outcomes, or created real value for those regions affected by the mining projects.
The economic strategy of creating shared value (CSV) offers a compelling way to extend the continuum of CSR activities and deliver greater social value.
Shared value works by identifying the points of intersection between the concerns and needs of host communities and the goals and requirements of companies. Creating shared value is then achieved by finding an entrepreneurial and mutually beneficial way to tackle common goals and shared needs.
While not a silver bullet, the outcome of shared value projects is a more consistent, lasting and direct impact on critical aspects of community wellbeing detailed in the UN Sustainable Development Goals (SDGs); for instance, education (SDG 4), energy (SDG 7), infrastructure (SDG 9) and water access (SDG 6).
Each of these areas is core to mining business success but also critical for community wellbeing, and they are directly linked to specific SDGs. For the company, managers can measure the business case for value capture, value generation and value protection.
Being able to illustrate the business return on investment may mean that CSV initiatives may not get cut as easily as philanthropic or other traditional CSR activities when markets are down.
Trust – hurdle and opportunity
Despite the apparent benefits, there are still relatively few examples of shared value initiatives in the mining sector. For some more in-depth case studies, please see Jocelyn’s publications.
One reason for this may be that while shared value presents an opportunity to build trust with host communities and improve stakeholder relations, it also takes trust to start them.
Shared value initiatives are more involved than any philanthropic or transactional CSR activity and have a long-term perspective. They also require several parties to get together and listen to one another to develop a common agenda with shared objectives and entrepreneurial ideas for achieving them.
It can take years to build those trusted partnerships, and this means that mining companies must show they are in it for the long haul. This can be challenging if projects change ownership several times during development.
So, how can a dialogue on shared value opportunities be initiated if trust is a rare currency?
Generally speaking, mining companies are well positioned to act as conveners: bringing the various stakeholders, suppliers, finance partners and community stakeholders to the table to start the discussion.
This can be initiated by whoever in the company – whether it is the CEO or the CSR department, community relations or the procurement departments – has built some level of trust and credibility with the respective stakeholder groups and has some decision-making ability to move initiatives along.
As long as communities are not fundamentally opposed to a particular mining project, avenues for dialogue to identify shared objectives should be accessible.
Whether mining companies are best positioned to lead the dialogue will depend on the case specific situation. Sometimes, Indigenous groups, civil society organisations or governments may be better positioned to take leadership of shared value initiatives.
Rethinking the mining business model
In order to tap the full potential of shared value, the talent pool inside mining companies may need to change to include more diverse skillsets. As shared value is about spotting market opportunities, an entrepreneurial mindset is required – something that classical CSR managers may not have.
Alongside talent, the business model of mining may also need to be adapted to initiate shared value projects. The incumbent business model in mining has changed very little over the past 50 years. Yet society has undergone significant changes during that time.
Recent end-user to mine supply contracts – from Tesla developing purchase agreements with mines to Apple saying it won’t use virgin material at some point in the future – suggest the gap between miners and end users is closing fast.
In addition, new non-mining entrants to the market and the emerging sharing economy could disrupt the mining business model even more fundamentally. This should provide motivation for miners to look for new partnerships and collaboration.
Shared value can be an avenue to start this process. Shared value can also drive innovation via the entrepreneurial solutions found when several parties work together to create something that hasn’t existed before.
It’s possible that the COVID–19 crisis, and the initiatives that mining companies undertook to support their employees and wider communities, helped to build trust between companies and communities – thereby paving the way to pursue shared value initiatives.
There is no empirical evidence yet for this, but where the pandemic brought people closer together, those relationships may result in increased trust.
To position mining as a catalyst for the sustainable development of resource-rich regions, mining companies may need to make another shift: a shift of mindset. A recent PwC report put this very well: “Miners that want to win in the future need to adopt a different mindset to the one dominating the sector today”.
This shift in mindset means reconsidering the position mining companies have in the socioeconomic ecosystem and the role they play, not just as providers of raw materials but as creators of societal capital and social value.
It means redefining the way mining companies think about themselves and creating a new vision and purpose for doing business.
One way of shifting perspective to create a new vision is to start defining the purpose of the company, not just through what it can get from society but what it can contribute.
When companies identify what they contribute to society (such as enabling the low carbon transition, contributing to the SDGs etc.), they can become more explicit about how fulfilling that purpose benefits society. This shift is one that can become a differentiator for success.
This does not mean that shareholder value is being abandoned, it just means recognising that generating long-term value for shareholders can only be achieved by delivering value to society as well.
Blackrock, the world’s largest investment firm, put it similarly in a recent issue of Larry Fink’s letter to CEOs: “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders”.
It is time to think differently about mining and what mining companies contribute in order to create a future where they continue to prosper.